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UK stock market commentary (October 22, 2012): All eyes on GDP data this week

It is all about growth this week as we get the first releases of GDP figures for the third quarter from the UK and US. Both are expected to rebound and certainly the coalition here in the UK will be breathing a big sigh of relief if the number comes in anywhere near the forecast of 0.6% following two quarters of negative growth on the trot. What’s been referred to as a “triple” dip recession is expected to come to an end as the economy should bounce back from the extra bank holiday during the Jubilee and get a welcome boost from the Olympics but as we’ve seen in the recent past there’s more risk of the figure coming in lower than expected. In the past two quarters the first readings have been far below expectations and this has been a recurring theme over the past few years so the markets are likely to be prepared for the worst come Thursday morning when the data is released.

There are strong arguments on both sides for GDP to come in above expectations and below consensus. In the above camp there is the lower unemployment, better than expected retails sales and continued strength in the services sector meanwhile in the below camp there is the fact that companies still are simply not pushing the investment button, so rather than spending more on trying to grow companies are either hoarding spare cash or returning it to investors. It’s also the ongoing uncertainty that is really causing firms to batten down the hatches as even though there have been some tentative signs on improvement in the eurozone, it remains unclear that the single currency is safe from a break up.

Last Friday the Dow took a real tumble recording a triple digit decline of quite large proportions as it fell over 200 points on the back of dismal corporate earnings in the US. The brands like General Electric, Microsoft and McDonald’s were too well known and investors got scared the real economy is still struggling to recover and the plunge was accentuated once the data for existing home sales indicated a decrease. Clients who have been consistent in selling the US indices were rewarded for their persistence and patience to wait for such a move to the downside, but for the more bullish investors out there they might see this as a buying opportunity. The Dow is at its 55 day moving average, the same level it bounced off a week ago and this support around 13300 was past resistance back in March and April so it might prove tough to push below.

This morning in Europe indices have got off to a negative start following the big falls in the US at the end of last week with the FTSE dipping below 5900 to 5880 at the time of writing. Late on Friday and much earlier this morning we had been calling the FTSE down as far as 5850 which did seem a little excessive so a degree of normalization has brought us back up with a few people thinking this might be a good chance to buy again following the dip.

Spanish Prime Minister Mariano Rajoy held his ground and denied his country is under growing pressure to ask for financial help from the European Central Bank. That pushed the euro 47 pips down against the greenback to end at 1.3020. The EU summit in Brussels failed to deliver any clear timeframe for a potential bailout and with regards to so called fiscal unity an agreement looks miles away for now, but the voting in Spain over the week end doesn’t look to have been as bad as many expected so the single currency is clawing back a little bit of Friday’s loss taking it to 1.3040.

Gold was not spared by the pessimism that engulfed global markets on Friday, dropping $18.9 to $1721.9. It was the fear of a slowdown for commodities already signalled by a Chinese economy losing some steam. However, a rebound in the dollar and a US economy not exactly in the shape for a meaningful comeback have also pushed the yellow metal down.

A stream of gloomy economic results for some of the US most recognized brands sparked concern in the energy sector regarding future oil demand. As a consequence, the WTI crude prices slumped $2.11 to $90.34 also helped by worries the European debt crisis is deepening or at best is going to take longer to sort it. A selloff in the stock market undoubtedly made matter worse for crude as did the slightly stronger US dollar.